Corporate / Private Equity / Financing NOVEMBER 2008 N°7 EDITORIAL Autumn leaves In this month's issue: Just as leaves fall off trees, amendments and legal texts twirl in all directions and cover Editorial............................... 1 every lawyer’s desk. Legal and Text Watch ........ 2 The contractual FCPR, an essential update to the French private equity vehicles in Recent Legal Advice and order to keep them leveled with international standards has been published with an Key Deals – Upcoming FAQ by the French Financial Market Authority which, could have because of its nature Conferences ....................... 9 jeopardized its survival immediately following its birth: this fund which was not intended to be limited to any ratio other than the ones freely negotiated between the management company and the investors, was about to be attached with a quasi- investment ratio amounting to 100% in non listed companies. At the same time, the order of 23 October 2008, gives a new dimension to contractual UCITS other than FCPRs. These UCITS can invest in all types of “products”, therefore including debt securities, while contractual FCPRs were not authorized to do so or, as debt securities are concerned, such possibility will be strictly limited. As a result, will the contractual FCPR be obsolete when it has just been formed? This order enables Funds, and as far as we are concerned, Hedge Funds and FCPI/FIP, to confine their liquid assets in side pockets by following a simplified procedure. Here is a text drafted at the ^perfect season! But the most incredible text produced this fall concerns, without any doubts, the Daniel Schmidt carried interest. Sorry, to actually use the right and official terminology, I should say the “bonus”. In his endeavor to “run after” LBO operators, Senator Jean Arthuis has Partner indeed succeeded in having an amendment adopted, such amendment not being definite at the time of this newsletter. The amendment would toughen the conditions granting carried interest in such proportions that they would be unworkable for the great majority of venture capital or capital development funds, or even for low or middle buy out funds. Let us hope that with winter approaching, this text will not be frozen in its actual version and that an Indian summer will allow some flexibility to bloom. As is the case every year, fall is decidedly a difficult season for private equity regulation. Legal and Tax Watch French Law on Modernization of the Economy (LME) update Under the powers granted to it by the Law on Modernization of the Economy (loi de modernisation de l’économie) adopted this summer, the government has launched a number of interesting reforms, particularly in the area of financial regulations and competition law. Financial regulations - Asset management for third parties The order of 23 October 2008 reforming the framework for asset management for third parties is the result of the work of the Financial Market High Commission (Haut Comité de Place) established a year ago by Christine Lagarde to strengthen the attractiveness of French financial markets. This order concerns all UCITS whether in the form of funds (FCP) or open-ended investment companies (SICAV). Henceforth, these entities may produce their documentation in a single language which need not be French provided the language selected is understandable by its target investors. Up until now, this exception was granted only for certain Funds (contractual UCITS, simplified FCPRs etc.). Further simplification was introduced by eliminating the requirement to appoint a deputy auditor. Finally and above all, these funds are authorized to transfer some of their assets whose disposal would not be in the interest of their investors to a new vehicle of the same form (SICAV or FCP). This transfer, which may be undertaken in the form of a spin-off, is authorized whenever exceptional circumstances and the interest of shareholders require. The decision is made by the extraordinary shareholders' meeting of the SICAV or the FCP management company. It does not require authorization by the AMF. Instead a simple declaration is required. Each shareholder or unit-holder receives a number of shares or units of the entity created equal to those it held in the spin off entity. This use of “side pockets” provides Funds attaining the end of their term a solution that has been demanded by professionals to liquidate their portfolios. In this way, fund managers will not force to dispose of illiquid assets still held by the Fund at fire-sell prices. The order considerably relaxes the provisions imposed for contractual UCITS by article L.214-35-2 of the Monetary and Financial Code (“CMF”). Henceforth, these funds, as an exception to the rules that apply to UCITS, may hold "products" and no longer exclusively financial instruments, bank deposits and liquid assets. In consequence, under certain conditions, they should be able to invest in movable and immovable property (without this property being securitized) and even to hold certain rights in personal or intellectual property rights….. We hope that lawmakers will finally have the good idea of extending this option to contractual FCPRs ! Finally, these contractual UCITS are legally authorized as FCPRs, to grant the management company a portion of liquidation proceeds. This should make it possible to issue shares very similar to those entitled to carried interest in FCPRs without however falling under the scope of the 2002 French tax instruction. Opinion Leaders 2 Finally, recent changes have been made concerning the marketing of foreign-law funds. It will be recalled that since 1 November 2007, following the implementation of the MiFID Directive, rights representing a financial investment in an entity issued on the basis of foreign law such as shares of Limited Partnerships, are henceforth considered under the law as financial instruments. However, the AMF has indicated that these rights may not necessarily be freely marketed (through public offerings or private placements). In a press release issued last April, it indicated that "open-ended" vehicles in which shareholders may require the redemption of shares by the entity may not be marketed until authorization by the AMF. In contrast, "closed-ended" vehicles may be marketed under rules applicable to public offerings or private placements. The above-mentioned order sets forth the AMF's position on “open-ended" funds whereby the latter constitute UCITS that are marketable in France after prior authorization by the AMF. - Others financial matters The Haut Comité de Place has also developed draft legislation recently or soon-to-be published. These proposals cover: - Disclosures on regulated markets (information concerning material holdings in listed companies, declarations of intention and issuers whose securities are admitted for trading on a regulated market) ; - Market making agreement (elimination of the obligation of transferring to registered form repurchased securities) and disclosure rules governing share buybacks (simplified disclosure rules) ; - instruments financial instruments (settlement of conflicts in law, indexation of debt securities and forward financial instruments, definition of participants in interbank settlement system or settlement-delivery systems for financial instruments, auctions for government bonds and negotiable debt securities) ; - public offerings; - preferred shares. The order of 6 November 2008 notably provides that preferred shares not carrying voting rights when issued do not carry preferential subscription rights. Competition law On 13 November 2008, an order was issued on the modernization and regulation of competition practices. This reform at least in part eliminated the French system based since 1986 on shared jurisdiction between the Minister of the Economy and the Competition Commission. Henceforth, the Autorité de la Concurrence, an independent administrative authority will be responsible for oversight of antitrust and anticompetitive practices. The procedure applied will be better organized to distinguish more clearly the different phases of the investigation and review process for issuing the decision. Finally, orders concerning bankruptcy protection and intellectual property laws are expected in early 2009. Opinion Leaders 3 Legal News Adoption of the law on earned income This law, announced well before the summer by the President of the Republic introduces reforms for voluntary profit-sharing schemes (instituting a tax credit to adopt voluntary schemes, etc), mandatory profit-sharing schemes (freedom of choice by the employee between the option of immediate and deferred access to income associated with mandatory profit-sharing schemes, extension to heads of companies with less than 50 employees and their spouses if they are employees or partners, etc) and stock options (grants in listed companies are subject to the proviso that the company granted stock options or bonus shares to all employees and at least 90% of all employees of it subsidiaries or the existence of an agreement for an exceptional or incentive plan, exceptional or voluntary profit-sharing scheme in favour of at least 90 % of all the employees of its subsidiaries). In the area of an employee savings plans, it may be regretted that the joint Parliamentary committee (Commission Mixte Paritaire) in the end withdrew its text that subjected certain employee savings funds to a procedure for simplified filing rather than a requirement to obtain prior authorization. This concerned